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Thursday, 23 November 2017

EMEA Leveraged Loan

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Head over wheels: Burdened by a difficult credit history, German automotive components maker Schaeffler managed to successfully syndicate an €8bn refinancing despite an uncertain European leveraged loan market. Because it reopened the market in 2012 and salvaged the company’s credit structure, Schaeffler’s deal is IFR’s EMEA Leveraged Loan of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

At the beginning of 2012, Schaeffler had a weak credit profile and a poor reputation among investors. But a successful €8bn refinancing in January 2012 of its Opco debt turned the company around to make it one of the most sought-after leveraged deals.

In 2009, Schaeffler’s €12bn takeover of Continental infamously became one of the largest European hung deals of the financial crisis after banks were unable to syndicate a roughly €11bn financing package.

While the six banks that underwrote the 2009 financing wanted to reduce their over €2bn exposure, Schaeffler needed to optimise its capital structure, which was split into Opco-Holdco financing. The company wanted to diversify its lender base, cut funding costs and push out maturities.

In an unusual move for a refinancing, Schaeffler asked four banks that were not existing lenders – BNP Paribas, Deutsche Bank, HSBC and JP Morgan – to underwrite the new €8bn deal. The underwriting was particularly important to the company as it wanted certainty of funding and execution in light of its 2009 experience.

“The success of the Schaeffler transaction was a strong signal that markets were open for large, underwritten and well-articulated story credits,” said Kristian Orssten, head of high-yield and loan capital markets at JP Morgan. “There is no doubt that the success of the deal played a major part in rejuvenating confidence in the primary loan market in 2012.”

Agreeing to underwrite €6bn-equivalent of loans and €2bn-equivalent of bridge loans to high-yield bonds, the arrangers launched the loan on January 30 to the European and US market.

“It is very rare to get a pure European cross-border deal. So despite its challenges it was an attractive deal for banks to be on,” said Bala Ramesh, vice-president loan syndicate at HSBC.

Reopening

As the largest loan for a European borrower since March 2011, the deal reopened an uncertain European leveraged market by testing the depth of liquidity after a shut-down in the second half of 2011.

“It was a large amount of debt taken at a difficult time in the market. In 2009 it was a stressed case and banks were stuck with a large exposure,” said Nick Jansa, head of European leveraged DCM at Deutsche Bank. “Everybody viewed the deal as impossible to do.”

Despite the difficult backdrop, the loan was a success, reflected in an oversubscription of the Term Loan C2 that was marketed to institutional investors, which was increased by €400m to €1.4bn and reverse flexed. The yield on the euro-denominated piece was cut by 62.5bp and by 125bp on the US portion through a combination of tightening margins, issue discount and interest rate floor.

Syndicating the deal to investors in the US and Europe presented a number of challenges. There was no existing institutional syndicate to sell the loans to and the deal had to be marketed as a new credit story, in a difficult sector, with a complex structure.

There was also uncertainty around how much institutional liquidity there was available after many leveraged deals were rejected in 2011. Given the size of the loan it required a transatlantic execution, a trend that many other borrowers followed suit later in the year. Both the loan and the high-yield bond syndication had to be aligned and well-orchestrated to create momentum for both asset classes.

Paolo Grassi, head of leveraged loan syndication at BNP Paribas, said: “The price of the C2 Tranche had to be carefully aligned with the bond pricing as there was investor cross-over on these two instruments and it was important not to cannibalise either financing.”

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